Getting a Return on Every Investment R.O.I.: Stop wasting Cash Flow
By: Samuel Stokes
Accountant Business Strategist
Director of Master Your Business
I'm Samuel Stokes from “Master your Business”. I've been an Accountant and
Business Strategist since the last 15 years; in that capacity, I've worked with thousands of business owners to build and scale their business.
I have often found that Entrepreneurs waste vital cash flow that could be better put to good use in growing their business. Every entrepreneur knows that they need to grow their business in order to succeed, but unfortunately they are missing a few essential tools to make sure those funds are being spent effectively.
Most entrepreneurs are so driven to grow their business that they don't stop to ensure that the money being spent is actually generating a return.
Oftentimes, this is because they are not quite sure how to work it out. One common mistake business owners make is to compensate for this lack of knowledge by throwing more money at it.
The problem is, if the money being spent isn't generating profit, the business will begin to leak cash.
The solution is easier than you would think. It all comes down to working out your Return On Investment or ROI. It is one of the most valuable tools for decision making you have at your disposal.
ROI, so what are you expecting to get back out of the money you are spending? ROI is essentially the 'What's in it for me' for your business.
R.eturn O.n I.nvestment
ROI % = Net Profit / Total Investment X 100
It's important to remember Net Profit is what you make after all the costs of delivering that product or service. If you sell something for $100 and it costs you $30 to manufacture and deliver it, then your Net Profit is $70
Let's look at a few common decisions every entrepreneur must face.
To Advertise Or Not to Advertise
Of course you need to advertise, but it's more important that you do so profitably.
Advertising ROI = Net Profit on the sale of your products / Total Ad Spend used to generate the sales X 100
Example: Our latest campaign in Urban Freedom Magazine cost us $2400 but brought in $8750 in sales. On those sales we made $4300 in Net Profit.
Advertising ROI = $4300 / 2300 X 100 = 186.95%
An advertising ROI of greater than 100% means that you have made back everything you have spent. In the above example we made back everything we spent plus 86%. We almost doubled our money. In essence, we should continue that campaign.
If the ROI % was less than 100% we should either stop the campaign (as it's sending us backwards) or adjust its messaging or offer to improve its effectiveness.
Launching a New Product
Products and services can be expensive to develop. Performing some preliminary calculations can help us work out whether or not it is worth our time and resources, or whether we should devote the resources to more profitable products and services.
If a new product is going to cost us $100,000 to develop we can use other numbers in our business to determine what it will take for us to break-even on this launch. We simply turn our formula around.
Let's say our product retails for $250 and our costs are $75, we know that we make a Net Profit of $175 on each unit.
Break-even would be a ROI of 100%. Everything above is profit. Anything below is a loss.
Break-even = $100,000 / $175
So we know that we would need to sell at least 572 units to make back our investment. Knowing our break-even point allows us to work out how viable our new product or service might be. It also helps us choose between several potentially profitable new products and services.
Using these simple tools, any entrepreneur can ensure their hard earned cash goes back into building their business and their future.